Lack of Mexican cattle pushes U.S. prices higher

Steak and hamburger lovers will pay more to eat beef in the coming year as the number of cattle imported from Mexico continues to plummet. Consumers may wonder what the two events have in common, but industry analysts said it’s a matter of supply and demand.

Caught in the middle are beef packers like Tyson Foods that rely on Mexican cattle imports to keep a tighter lid on fed cattle prices in the U.S. which they procure, slaughter, process and sell.

“I project that we will import roughly 800,000 head of Mexican cattle for 2013, down from 1.46 million head in 2012. Mexican imports of less than 1 million head are likely for the next two to four years,” said Derrell Peel, livestock marketing specialist at the Oklahoma State University.

He said roughly 1% of the projected 6% decrease in steer and heifer slaughter in 2014 will result from the lack of Mexican cattle.  

“The loss of Mexican cattle contributes to overall declining feeder cattle supplies that will be quite severe from this point on. I expect to see cattle slaughter decrease about 7.5% in the fourth quarter of 2013 and to decrease about 7% for the entire year of 2014,” Peel said.

Discounting for cow slaughter, Peel expects steer and heifer slaughter will be down roughly 6%, which is about 1.5 million head less in 2014 compared to 2013.

The impact for packers like Tyson Foods or Cargill, is that reduced volumes of fed cattle are sure to push up cattle prices, which brings down packer operating margins. Peel estimates fed cattle prices are likely to exceed $135 per hundredweight in the spring of 2014, noting that $140 is possible.

Beef packers have already started to see their margins slowly decline in the past two weeks, falling another $4.17 per head last week to $14.10, according to the Sterling Beef Profit Tracker. While margins are slim, Packers are faring better than this time last year, when they dealt with losses of $33.34 per head, according to Sterling Marketing Inc.

The reason behind fewer Mexican cattle imports is two fold, according to Peel. First the industry dynamics in Mexico have changed from a commodity carcass-based model to a processed boxed beef model. In other words Mexico is processing more of its own cattle and selling that product as boxed beef into the U.S.

Secondly, Peel said the severe liquidation of cattle in Mexico in recent years has resulted in a decrease in Mexican cattle available for export to the U.S. Though data to confirm are limited, Peel said it appears that the shortage of cattle in the Mexican market is very acute.

The underlying economics in the beef industry are complicated as the U.S. relies heavily on beef imports to satisfy its huge demand for hamburger meat and at the same time relied on export markets for higher margin beef products from prime rib to tanned leather.

Peel said most of the hamburgers consumed at restaurants in the U.S. comes from cows raised in Australia and New Zealand, processed into frozen boxed beef and shipped via container to the U.S. Meat sold in food service outlets is subject to Country of Origin Labeling that is required in retail sales.

He said if the U.S. were to try and meet the ground beef demand with only U.S. beef that would be grinding higher value cuts into hamburger – certainly possible but a waste of value.

“It’s like using a Lexus to haul things rather than a pickup truck just because you don’t make enough pickups,” he said.

Peel said the Mexican cattle imports and continued trade with all of the U.S. export partners are crucial to maintaining the balance between supply and demand which keeps packers in the green and consumers buying beef.
 
“We are in rather uncharted territory as far as beef demand is concerned. The supply decrease suggests the potential for retail beef prices to rise 10% to 15% or more but it will be tempered by larger pork and poultry supplies as well as other demand factors,” Peel said.
 
Choice beef set a retail high price in July at $5.35 per pound, according the Bureau of Labor Statistics. The retail price rose 6.86% from a year ago and its up 9.95% from two years ago.

Retail chicken prices have also risen sharply in the past year with skinless, boneless breast meat hitting a high $3.55 per pound in July. The retail price jumped 5.65% from last year its 9.91% more expensive that two years ago, according to U.S. Department of Agriculture data.

Fresh pork cuts retailed for $3.50 per pound in July, down from $3.78 a year ago and flat against prices in the summer of 2011, according to BLS data.

Peel expects the pricing gap between beef and other meat proteins to widen in the coming year.